Do you consider real estate a business or an investment?

[Anne M.]

We started looking into investing in US real estate a few weeks ago.

We're looking to diversify our investment portfolio. Right now, it's all in the stock market (mostly index funds). 

Listening to the podcast, reading the blogs and posts here on the forum, I see that many investors treat this more like a business. They put a lot of time and effort into finding just the right asset, leveraging it and actively increasing their portfolio. It all looks very interesting but I have my own business that I work at and I'm not really looking to develop another one.

Should I even look into investing in rental properties then? How time consuming is it? And by that I also mean time required to learn the basics to the point where the risk is within reason and we get at least 8-10% annual yield after expenses. Anything less than that, and buying index funds is so much easier and safer (we're long term investors), so why even consider real estate? I currently have an offer for a turnkey rental property in Memphis and I wonder if it's really worth even the hassle of going through with the buying process. If it's going to end up costing us more time down the road, maybe we should just take the $70K and put it into more index funds?

I'd love to hear from other investors here who do this as an actual investment for passive income rather than as a business. What's your impression following several years of owning a rental property? Is it worth the hassle? Is it really a form of investment (passive income) or is it a business that requires managing?

[Alex Craig]

@Anne M. quick answer is, depending on the level of involvement, it can be both or just a investment. We have some investors that we rarely hear from and let us make virtually all the decisions with their property as one would with a financial adviser; to me, that is more of a investment. Then there are our clients who want to actively be involved in decisions, which is fine as some investors want to be more active then passive.  To me, that is more of a business. 

To answer your questions in order.

1) Yes, BP is a good place to learn. I own 17 and adding # 18 today and # 19 in 3 weeks. I like the control REI give me and how there is a blended return. Of course there is cash on cash, but also equity built by the tenants rent, tax savings and the one that is least most important to me, appreciation.

2) At first, until you find the people you want to work with that will work for you and help you accomplish your goals through a mutually beneficial relationship, it can be time consuming. Once you find that team, it can be very passive. Learning risk and returns can be accomplished by selecting the right company who listen to what you want and explain how they can help you maximize returns and minimize risk. 8 to 10% is reasonable, some years you will do better, some years if you have a vacancy and a capital expense, it could be less, but over the lifespan, with a good property manager, that is obtainable. Also, realize the blended return I discussed in # 1. The blended return is why real estate can be so much better then investing in typical financial products.

3) Going turnkey should not cost you more down the road. It should maximize your returns and give you the option of being a passive investor. You would have to explain how it would cost you more for me to better address this concern.

4) When I first started buying more portfolio back in 2007, it was passive for me as I had a corporate job. I hired a property manager and he did all the work. I became active when I became a full time real estate investor, property manager and TK provider.  That being said, I am very passive with my portfolio as I let the staff of my PM company make every decision and I review my statement periodically. There are several investors on BP that can share their experience with you.  The key to making it passive is a PM who can provide excellent service. My impression of owning rental property for several years is very positive. Being a US investor, I was able to get 30 yr mortgages and now I have 10 and 15 yr mortgages too. I get really excited thinking about a large portion of my portfolio being paid off before I turn 50 (I am 39 now). That will help with the 3 weddings I will pay for one day, 12 years of college and private school education tuition increase they will see when they get to high school. Then when all that is paid for, maybe I can take a vacation with my cash flow! Lastly, at first it may require some management until you are 100% comfortable with your Property Management and if you continue to buy, the organization you selected.